The range of options is bewildering; it’s often very hard to tell the difference between two funds.

Sadly, most investors (often with the “help” of their advisors) will select a unit trust purely on the most recent performance.

It is a well-known phenomenon that the best performing funds get the most new investments.

This is often a terrible way to select a unit trust.

Here are some pointers to help you make a decision on what fund to choose:

What job should the unit trust do for you?

If you are investing the money for a new car in two years’ time – you need to choose a unit trust that is either a money market or income fund (i.e. something that is low risk, and only pays interest).

If you are investing for your month old baby’s wedding in 25 years; you should invest in a fund of shares.

If you have three to five years; you might need a stable, moderate or conservative fund.

For a time horizon of five to 10 years; a balanced fund would be better.

Get a grip on how much these funds can lose in a year, and whether you can tolerate these losses.

Costs

It is well proven that funds with the lowest costs are often near the top of the rankings in their category over longer periods of time.

Costs are a drag on performance.

A well-run fund can do a good job for you, but the costs are always a disadvantage.

This does not mean that the lowest cost fund is always going to be best, but it has less of a burden to carry.

Index or active

History shows that eight out of 10 fund managers fail to beat the market after costs.

This is a scary stat for fund managers, but the two out of 10 who do beat the market achieve significantly better growth.

It is, therefore, hard to ignore their performance, and probably a good idea to combine your investments if possible.

Performance

The problem with investing based on performance alone is that the best performer today could be the worst performer next year.

Property unit trusts provide a great example:

A year ago the top ranked fund was dominating the sector; it was first over nearly every time period.

As of last month, this fund is stone last over 12 months (41st out of 41 funds).

It lost investors 9% over the last year.

The current best performing fund made investors 11% over the last year, and was ranked in the top 10 a year ago.

Be wary of always selecting the top fund as your main criteria.

Consistency

Rather invest in a fund that is regularly in the top 10 of its peers instead of a fund that is currently first.

A fund that has the ability to consistently remain in the top 10 over one, three, five and 10 years proves it is able to deliver consistent returns, rather than relying on luck.